Europe faces new China dilemma amid flagging hydrogen dreams

Europe’s electrolyser manufacturers are ceding ground to Chinese competitors, putting pressure on politicians to shield the emerging industry using the EU’s new industry law. 

In late 2023, German Chancellor Olaf Scholz signed an electrolyser stack, as part of opening celebrations at the Siemens Energy gigafactory in Berlin. With an annual production capacity of one Gigawatt (GW) – and ambitions to triple this by 2025 – the factory could easily supply Germany’s targetted deployment of 10 GW by 2030. 

With solar, wind and battery supply chains dominated by China, electrolysers – essential to turning water into hydrogen, powering clean chemicals and steel – offers a fresh opportunity for Europe to retain leadership in green technology.

For politicians, that economic promise is key. Siemens’ “production will continue to grow and success will return,” said Scholz when opening the factory, while also celebrating the reversal of ‘deindustrialisation’.

Dutch researchers, TNO, found that in 2023, China had 34% of global manufacturing capacity. Despite its smaller economy and population, Europe managed to hold 27% market share.

The global market will be lucrative. It is currently valued at €25 billion by the consultancy BCG, with a large growth potential growth. Politicians therefore are keenly interested in the health of Europe’s electrolyser manufacturers.

“What happened with photovoltaics must not happen again with electrolysers,” says Jens Geier, a German (S&D) Member of the European Parliament (MEP), with a keen interest in hydrogen.

Over-supply and lower demand

But in Europe demand for electrolysers is lower than anticipated. 

This mirrors a global trend. The International Energy Agency (IEA) finds that a third of additional manufacturing capacity is dependent on genuine hydrogen production investments – but just 4% of announced projects have entered their final stages around the globe. 

Given China’s already-large manufacturing capacity, “this could lead to a situation similar to that of solar PV, where capacity that is surplus to the needs of the domestic market can enable exports to other regions,” explains the IEA.

“This is the beginning of a path that we should not go down,” stresses Geier. 

Drawing comparisons to Chinese solar dominance has been the central argument put forward by the European hydrogen industry for years.

 “European money is finding its way into the hands of non-European based competitors,” warned a letter lobbying the European Commission in early 2023. 

A study by consultancy BCG released on 24 May comes to the conclusion they are on track to dominate Europe in electrolyser manufacturing.

“After solar and battery technology, Europe is at risk of losing another promising green industry to China,” warns BCG partner Sebastian Schrapp as quoted by dts.

He warns that China is catching up with Europe on the volume of hydrogen patents – a key indicator of a country’s technical mastery of the technology.

Traditionally, the EU has a long-standing global lead when it comes to hydrogen patent filings, with a slightly less than a third of global filings in production, storage and end-use. 

In contrast Chinese patents across these categories did not exceed 5% in the past decade, a report by the IEA and European Patent Office found. 

But BCG found that Chinese patent filings grew 40% since 2015, a much higher rate than the 15% growth rate of the previous decade identified by the IEA.

A clash of technologies

At the heart of the difference between China and Europe is one of technology: while all electrolysers produce hydrogen by running an electric current through water, processes differ.

China’s focus is on cheaper alkaline electrolysers.

European companies have a twin-track approach. But a majority of new investments is going towards the more costly ‘Proton exchange membrane’ (PEM) variant.

PEM electrolysers produce more pure hydrogen than their alkaline counterparts – and are ten times quicker to start up, reaching full operational capacity within minutes, and allowing for smooth response to renewable power peaks.

This allows PEM operations to match fluctuating renewable energy production on an hourly basis – in line with EU rules.

But they are far more expensive. Some reports indicate that Chinese alkaline electrolysers come in at a quarter of the cost of European PEM electrolysers. 

China does not dominate, yet

Despite fears within the industry, Chinese electrolysers have yet to make a significant impact, the most recent EU award of €720 million for hydrogen production to 5 projects, were mostly located on the Iberian Peninsula.

Of the 132 projects applying for EU funds distributed by the EU’s Hydrogen Bank, only 20 intended to produce hydrogen using Chinese technology. In comparison to the 24 projects that relied on German electrolysers. 

The European Commission is in the midst of a crackdown on imports of Chinese electric vehicles and solar panels. But up to now, data suggests there is little meaningful import of electrolysers from China.

“So far complete electrolysers have not been traded between China and Europe,” according to TNO, although some component trade is occurring.

Industry body, Hydrogen Europe, did not disclose any relevant data to Euractiv, nor did the European Commission respond to our enquiry.

But TNO is sounding the alarm, calling for “restricting market access for Chinese parties.” They want government auctions to include non-price criteria, because “it is unlikely that European players can remain competitive on costs compared to Chinese players.”

Electrolysers are among the long list of technologies listed in the EU’s Net-Zero Industrial Act (NZIA). The goal is to ensure that by 2030, 40% of installed devices are made in Europe. It will also allow national governments to impose the non-price criteria referenced by TNO. 

Though the act enters into force in June, political will is required to implement the stringent restrictions.

Other industries, particularly wind and solar, have benefited from EU country declarations committing to implement the NZIA’s  market restrictions. Whether this will be the same for electrolysers, is one of the tough choices coming up.

[Edited by Donagh Cagney/Rajnish Singh]

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